The European Commission’s inability to investigate and remedy minority shareholdings which fall short of conferring “control” on the acquirer have led some critics to point to an “enforcement gap” in the EU merger control regime. This briefing note will examine the EU regime in more detail and compare it with the approach taken by the UK authorities in the recent case of Ryanair/Aer Lingus.
The Merger Regulation
The European Union Merger Regulation (the Merger Regulation) applies to mergers, acquisitions, and other forms of “concentration” that involve a lasting structural change in control. This can occur where two corporate entities merge or where one acquires direct or indirect control over another (including the formation of so-called “full function” joint ventures).
The application of the Merger Regulation to minority shareholdings requires the holder to have direct or indirect control of one or more other undertakings. The Merger Regulation defines “control” as the ability to exercise “decisive influence”. This may take the form of positive rights that give the holder direct operational control of another company, for example through preferential shares that allow the holder to determine the company’s strategic commercial behaviour. Alternatively, it could take the form of negative control whereby the holder has veto rights over strategic decisions such as the approval of the business plan or of capital expenditure above a certain threshold. A minority shareholder may also be deemed to have de facto control where it is highly likely to achieve a majority of votes cast at annual shareholders’ meetings, given the level of its shareholding together with other factors including the dispersed nature of the remaining shares.
National regimes and the reform of the Merger Regulation
In contrast to the position under the Merger Regulation, certain countries in the European Union have national merger control laws which apply to the acquisitions of minority shareholdings which may fall short of conferring “decisive influence”. In Germany, notification is required for all acquisitions of at least 25% of shares (capital or voting rights) in another corporate entity. In some cases an acquisition of less than 25% of shares can be notifiable. In the United Kingdom, the merger control rules apply to all acquisitions resulting in “material influence” over the company in which a minority stake is being acquired. Material influence is assumed to exist for shareholdings of 25% or more and may even extend to shareholdings of less than 15% where other circumstances exist which confer material influence over policy.
Because the European Commission (the Commission) cannot investigate acquisitions made by non-controlling minority shareholders, it has been argued that there is an enforcement gap in the Merger Regulation. In March 2011, Joaquin Almunia, the EU Competition Commissioner, stated that the European Commission would consider whether the problem was significant enough for the Commission to propose new measures to close the gap. The Commission is considering the potential for both unilateral and co-ordinated effects. Unilateral effects include the possibility that a non-controlling minority shareholder would have less incentive to compete with a target in the same market, or could discourage potential takeovers of the target in such as way as to impede the development of competition. Co-ordinated effects could include the buyer having increased levels of information on a competitor or the increased risk of collusion or the exchange of confidential information.
The current enforcement gap in the Merger Regulation is illustrated by the contrasting approaches taken by the Commission in Schneider/Legrand and Tetra Laval/Sidel on the one hand and Ryanair/Aer Lingus on the other.
Reversing an implementation: Schneider/ Legrand and Tetra Laval/Sidel
Under Article 8(4) of the Merger Regulation, where a “concentration” has been implemented, the Commission can require the relevant party to dispose of any shares acquired and return the undertaking to the position before the concentration was implemented.
In Schneider/Legrand, Schneider Electric acquired 98.1% of the shares of Legrand by way of a public offer. This gave Schneider the ability to exercise “control” over Legrand under the Merger Regulation. The Commission found that the transaction was incompatible with the common market because it created a dominant position with the effect of significantly restricting effective competition on a number of markets. The Commission therefore ordered Schneider to divest the majority of its stake in Legrand so that it no longer had a “significant holding”, either by a private sale to a third party or the sale of Legrand shares on a stock exchange.
The Commission’s approach in Tetra Laval/Sidel was very similar. Tetra Laval S.A. acquired 95% of Sidel’s shares by way of a public offer, which the Commission judged would create and strengthen dominant positions for Tetra Laval in three markets where the parties were direct and close competitors. Tetra Laval was ordered to divest its shareholding in such as way as to sever any structural or financial link between itself and Sidel, whether by stock exchange flotation or sale to a third party.
The enforcement gap: Ryanair/Aer Lingus
Schneider/Legrand and Tetra Laval/Sidel demonstrate the Commission’s enforcement powers under Article 8(4) where a public bid has been implemented and “control” obtained. However, the Commission’s inability to deal with minority shareholdings falling short of conferring “control” was shown in the case of Ryanair/Aer Lingus. Ryanair, which already owned 25.17% of Aer Lingus’ shares, made a public bid for the rest of the company in October 2006. This attempt to acquire sole control was blocked by the Commission in June 2007. Aer Lingus argued that the Commission should also order Ryanair to divest its minority stake of 25.17% on the basis that it represented a partial implementation of the acquisition which had been prohibited.
The Commission distinguished the case from Schneider/Legrand and Tetra Laval/Sidel on the basis that Ryanair had not acquired control of the target (on account of the Commission’s prohibition decision), which meant that the Commission’s enforcement powers under Article 8(4) could not apply. The Commission was therefore unable to order Ryanair to divest its minority shareholding in Aer Lingus, even if (as Aer Lingus argued) competition could be distorted by an undertaking owning a large stake in a direct competitor.
In contrast, at national level the UK authorities are investigating Ryanair’s shareholding in its rival, which now stands at 29.8%. The authorities assumed jurisdiction on the basis that Ryanair’s “material influence” over Aer Lingus gave rise to a “relevant merger situation”. The “material influence” test – which is satisfied if there is an ability to materially influence policy – represents a lower threshold than the European Commission’s test of “control” and gives the UK authorities more extensive powers than the European Commission to investigate and dissolve minority shareholdings. In June 2012, the Office of Fair Trading concluded its 18-month long investigation by referring the matter to the Competition Commission, which is expected to rule by November 2012.
The issue of minority shareholdings is complex and acquirers of such holdings, especially in direct competitors, should be aware that international merger control regimes have different rules regarding the ability of their regulatory authority to investigate and order remedies. The case of Ryanair/Aer Lingus is an example of how one regime can use a relatively wide-ranging test of influence to investigate a minority shareholding while another regime’s test is too stringent to do so. Companies should therefore be aware that relatively small shareholdings that could nevertheless give rise to a distortion of competition are not immune from investigation by national authorities such as Germany or the UK.
While at EU level the European Commission’s powers to investigate minority shareholdings are limited, companies should be aware that the current review being undertaken into the socalled enforcement gap raises the possibility that the EU regime will close the gap in the near future.